Interview of the Month with Lukáš Mikeska, Director, Restructuring and Debt Advisory, KPMG

Base interest rates of both the Czech National Bank and the European Central Bank are still very high compared with the period since the global financial crisis in 2008 and 2009. Has it generated serious financial problems for the companies in the Czech Republic? Could you also please differentiate between large corporations and SMEs?

In general, massive financial problems have not been generated. Yes, there was a mild recession and many companies suffered, but given the magnitude of the interest hikes and other rather brutal external events, Czech companies as a whole showed a surprising resilience. We did not see a wave of bankruptcies. And, by the way, a very similar situation can be seen in other developed countries.

Having said that we have to keep in mind that interest rates will probably not go to the very low levels seen during the previous decade and in the long-term higher rates may take their toll at some companies.

What we certainly see is that some companies, while still able to service their debt, use their whole EBITDA to do that. They do not make any money for their shareholders and they do not invest. This of course will cost them in the future.

SMEs usually have less fat and therefore are more vulnerable. Also, when the rates in the Eurozone were significantly lower than in the Czech Republic, it was naturally easier for larger companies to be financed in cheaper euros.

You have been active in debt advisory consulting for some time. Could you please elaborate on what debt advisory is actually about and how it can help companies, especially those in financial troubles?

It is important to stress that debt advisory does not equal distress. Debt advisory is not yet very common or mature service in our region, but it is primarily a service for any healthy company as well as distressed businesses. Our experience from distress and deep knowledge of lenders, however, helps us in discussions with debtors as well as lenders, even in not distressed situation.

Added value of debt advisory lies in the following factors:

• First, it shows businesses broader opportunities of the debt market. Which banks are good at which products, sectors or territories. But also, what are the alternatives to banks, such as bonds, increasingly popular direct lenders and others. Knowledge of such options can open up new possibilities for expansion the client did not previously consider reachable for him, be it in our region or internationally.
• Second, an independent view on debt options, e.g. banks may tend to sell you what is good for them at a given point in time, push the products they want to market for whatever internal reasons. We can bring the independent view and comparison of other options. This should result in a right mix of products and best pricing for the client. Our experts from the whole KPMG network agree that as a rule, our help always brings savings that are much higher than the cost of our service.
• And third, while working on the mandate, as an additional value, experienced debt advisor may help the company with financial planning and risk management, typically through discussions over business plan and financial plan. This is where sometimes the biggest value of the advice may actually be, helping the company realistically and responsibly plan its financial future.

Based on your professional experience in debt advisory and restructuring, what are the key specifics of financial management in Czech companies? Are there any significant differences between CFOs of Czech companies and CFOs abroad?

Czech companies have often feeble or sometimes even non-existent financial management. It can be just stunning how some fairly large companies just do not see that financial management is really the heart of any company. No financial plans, small controlling, good friends with their relationship manager in their bank and that is it. This is because many Czech companies grew from nothing and are family owned. The owners tend to know the company by heart and not that much through detailed numbers. But to be sure, our colleagues from Germany describe something very similar when they talk about German Mittelstand. Big international companies are on the other hand sometimes hyperfocused on controlling and financial management.

As regards your consulting practice in restructuring, which major trends have you registered since the pandemic period in 2020?

Impact of high interest rates, impact on companies that exported to countries affected by the war, slow consumer demand and structural changes in the automotive and energy industry. These are the underlying sources of most of the restructuring cases in the market right now.

What is your current typical advice to your clients in general to solve their excessive financial leverage? EBITDA enhancement, net working capital (NWC) optimization, CAPEX optimization or asset disposals? Or is it usually a combination of these actions?

As suggested, it is usually a combination of the above plus overhead optimization. But especially working capital optimization we consider as an area which is usually less explored by the companies and where we see a lot of potential for the clients and for our services. KPMG has recently developed a lot of smart tools on the global level that will help us in unlocking potential, i.e. cash, for our clients.

Among the key trends in the financial industry across the globe in recent years has been the phenomenon of non-bank lending, i.e. private debt. Could you please explain what it is all about in general and elaborate on the usage of private debt in the Czech Republic in particular?

This is a fast-growing area in the US and Western Europe. In a nutshell direct or private lending is a more flexible but also pricier alternative to banks. Private lenders are usually vehicles set up by investment funds. Their focus would be on deals starting at EUR 20 mil upto EUR 1 or 2 billion. They would charge higher interest rates than banks, but are not limited by banking regulation or other pressures as a bank. Their advantage is therefore speed, flexibility in decision-making process, often lighter covenants and possibilities to provide funds to sectors and situations where banks cannot go and do not want to go. Such as defense, fossil energy, higher leverage, special situations, more stretched M&A expansion.

Typical user case would therefore be an acquisition of traditional energy source, buyout of a business from bankruptcy or a need for a speedy acquisition financing or a combination with a bank financing as junior debt.

Corporate bonds in the Czech Republic, especially those smaller issues, seem to an ongoing huge problem. What do you think about the current corporate bonds “ecosystem” in the Czech Republic?

To my sheer astonishment, the market of corporate bonds has not totally collapsed as a result of some of the infamous bankruptcies. In years with non-existent interest rates on savings accounts in banks, people desperately invested in some very bizarre companies and projects. On the top of that, insolvencies of such issuers are very hard to manage as well, as there is a lack of dominant, sophisticated and experienced lender such as a bank. The small retail creditors sometimes make a second mistake and are a a result they are represented in the insolvency process by the same people who sold them the crap, or people connected with them.

I am not sure regulation is an answer here, rather a constant education of retail investors. They must look at the issuer, what is the business, what is the history, who is its auditor, who is the arranger. There should not be a red light in any of those categories.